OK, so it might be better to give than to receive, but, honestly, who’s going to complain about getting a little something in return for their giving?
Those who are conscientious before the year ends stand a decent chance of making sure their gifts and charitable donations to qualifying institutions grow – and their tax bills shrink.
“It’s important to know how to give smartly,” said Kevin Mann, vice president of finance and administration for the Denver Rescue Mission. “In the end, you can do much more good for more people by taking a few simple things into consideration.”
Gifts without gift tax
The federal tax code allows an individual to give any other person up to $12,000 a year without being subject to the gift tax. That means a husband and wife could pass along to a grown child and that child’s spouse a total of $48,000 a year. Add two grandchildren, and the husband and wife’s annual gifts could total $96,000.
Gifts up to the $12,000 tax-free limit may be repeated annually and to as many recipients as givers would like.
Don’t forget that non-cash gifts, such as jewelry, property and stocks, count toward the annual limit. And because gifts are to be accounted for in a calendar year, it’s a good idea to make sure they are completed before Dec. 31, said Erwin Buck, a certified financial planner for Asset One in Aurora.
College savings accounts
Want to give your child or grandchild an education? Under a Section 529 state college savings account, each donor could give up to $60,000 to a child – or a couple could give up to $120,000.
If the money is used for college or graduate-school expenses, withdrawals aren’t subjected to federal tax. Contributors to 529 accounts may be eligible to receive state income-tax breaks.
Tax-free giving also could help the preschool and prep school sets. Coverdell Education Savings Accounts pay for pre- college costs, such as computer purchases, tutoring and private-school tuition. But Coverdells also have restrictions: Contributions to accounts can’t be given directly when the donor’s annual gross income reaches $95,000 for a single person or $190,000 for a couple. Total account contributions also are capped at $2,000 per child per year.
Buck, the financial adviser in Aurora, recommends that givers also consider passing along to a student highly appreciated stock or other assets.
If givers sold those assets, they probably would have to pay a 15 percent federal tax on the gain. But this year and next year, students can sell appreciated assets and pay capital gains tax at a rate of 5 percent. In 2008, 2009 and 2010, they’ll be able to sell appreciated assets without having to pay capital gains.
Enterprise zone breaks
The state of Colorado works with an array of nonprofit organizations to boost job creation and preservation.
Giving to entities included in one of the state’s enterprise zones may result in substantial tax benefits. Donors will receive a 25 percent state tax credit for cash gifts and a 12.5 percent state tax credit for non-cash contributions, such as stock or furniture. Donors also may be eligible for federal tax deductions.
If the donation is for child-care programs within an enterprise zone, contributors may claim a 50 percent state tax credit.
“In the end, a $500 gift might actually cost someone only $250 out of pocket once they realize all of the tax benefits,” said Mann, who directs the finances of the Denver Rescue Mission, which is a designated enterprise zone participant because it offers employment-support services.
For more information about enterprise zones and the organizations included in them, go to advancecolorado.com /enterprise-zone/index.cfm.
Giving away your stuff
You might want to take pictures and make sure your receipts are in order before hauling used goods to charities.
A new rule that went into effect last year requires used non-cash donations be in “good or better” condition or they won’t be tax-deductible. If you’re concerned about an audit, be prepared to show documentation of the quality of your goods.
An additional form must be completed to claim a deduction for non-cash contributions totaling more than $500, according to H&R Block. And for cash donations of $250 or more made during 2006, deductions will be granted only with written acknowledgment from qualified organizations.
Cars, mileage and charity
Just as the feds don’t want taxpayers dropping off their junk at Goodwill and claiming deductions, they don’t want taxpayers collecting unreasonable breaks for their beat-up cars, either.
Since 2005, the deduction for charitable donations of cars, boats and planes that are worth more than $500 – and are in turn sold by a charitable organization – is limited to gross proceeds from that sale.
And if you’re using a vehicle to do charitable work, don’t forget to deduct the costs on your next federal tax bill.
The Internal Revenue Service has increased some standard mileage rates. As of Jan. 1, the rate rose to 20 cents per mile driven for medical or moving purposes and 14 cents per mile for charity work. The rate for charitable work for causes related to Hurricane Katrina is 32 cents.
Staff writer Christine Tatum can be reached at 303-954-1503 or ctatum@denverpost.com.
